Is it another "subprime mortgage crisis" script? Goldman Sachs promotes "shorting corporate loan strategies" to hedge funds

As pressure signals in the private credit market continue to emerge, Wall Street's largest market makers have quietly begun to position themselves on the other side.

On Tuesday, the Financial Times reported that Goldman Sachs is promoting a strategy to short corporate loans to hedge fund clients, with the core tool being a derivative known as a "total return swap," which allows investors to profit when loan prices decline. Sources revealed that Goldman Sachs has recently received inquiries from multiple clients regarding this and has proactively contacted hedge funds interested in shorting loans to technology companies. The bank has not yet completed any actual transactions.

Against this backdrop, the private credit market is under multiple pressures: BlackRock announced restrictions on redemptions from its $26 billion corporate loan fund, Blackstone's private credit fund faced a record 7.9% redemption requests, and PIMCO warned that the direct lending industry is entering a "full default cycle." This series of signals has heightened market concerns about the asset quality of corporate loans.

This scene has led some market observers to draw parallels with the period leading up to the 2008 financial crisis. At that time, a team of Deutsche Bank traders led by Greg Lippmann marketed up to $35 billion in credit default swaps (CDS), assisting clients in shorting subprime mortgages, ultimately earning substantial fees for Deutsche Bank during the crisis—Wall Street's role as a provider of shorting tools during times of risk accumulation seems to be replaying in the corporate loan market.

AI Impact Sparks Shorting Demand

The shorting strategy promoted by Goldman Sachs is directly aimed at the enterprise software sector. Between 2020 and 2024, private equity firms have spent hundreds of billions of dollars acquiring enterprise software companies, whose business models are now directly threatened by advancements in AI technology, leading to downward pressure on related loan prices.

Sources indicate that Goldman Sachs is not engaging in large-scale public marketing but is targeting specific clients. A portfolio manager with decades of experience on Wall Street told the Financial Times, "I have never seen so much discussion about brokers assisting hedge funds in shorting loans in my career."

According to previous reports by the Financial Times, interest in shorting loans has continued to rise among hedge funds after Apollo Global Management successfully shorted several large loans to software companies last year.

Tool Scarcity, Structural Gaps in the Market

Despite the U.S. leveraged loan market expanding to $1.5 trillion, hedge funds have extremely limited tools for large-scale shorting.

Loans are essentially fixed-income contracts provided under customized terms, with significant differences between companies; some loan documents even explicitly restrict certain asset management firms from participating, further limiting the circulation of loans among different funds. Several hedge funds told the Financial Times that they had previously attempted to short loans through swaps but found it difficult to locate institutions willing to take on counterparty risk.

Another alternative is to short exchange-traded funds (ETFs) that bundle loans, but the main ETFs cover multiple industries, making it impossible to make precise bets on the debts of specific software companies However, this business of Goldman Sachs is not without pressure within the bank. Assisting hedge funds in shorting corporate loans presents a potential conflict of interest with the bank's underwriting of similar loans—issued by none other than Goldman Sachs' most important client group: private equity firms. Goldman Sachs responded, stating, "As a market maker, we communicate with clients daily regarding their desired trading strategies, which occurs across various asset classes and market environments every day."

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